Securities Investment Damages Litigation Relief Theory

Author: Liang Huixing
Publisher:
Publish Date: 2002-07-01
Features: The central theme of this book is that securities investors who suffer losses due to the illegal or grossly negligent acts of others should have the right to file civil lawsuits against the actors and obtain economic compensation. The research significance of this book lies in providing theoretical support for securities investors seeking legal redress in the context of China's existing imperfect legal provisions and lack of judicial guidance. By employing comparative research and comprehensive analysis, the book achieves the following results: It constructs a theoretical framework for holding directors and senior management personally liable in civil law, and proposes corresponding recommendations and ideas from the perspectives of securities law and company law at the level of legal interpretation and legislation, filling the research gap in this field within China.
The litigation redress for securities investment damage involves a very broad scope, and this book focuses on the perspective of listed company shareholders suing directors and senior management. This is primarily based on the following two considerations:
1. From a securities law perspective, after purchasing stocks, the public becomes an investor who may suffer direct trading losses due to price changes caused by securities fraud and other illegal activities. From a company law perspective, they become shareholders who may suffer indirect damages to their investment interests within the company due to illegal infringement of company assets. Research on the litigation redress mechanism for securities investors (shareholders) should integrate the legal protections provided by both securities law and company law for investors/shareholders.
2. Fundamentally, a company is a legal fiction, and its actions largely depend on the performance of directors and senior management. The actions or inactions of these individuals have a critical potential impact on the rights of securities investors. International experience shows that holding directors and senior management personally liable for compensation contributes to the improvement of corporate governance structures and the development of securities markets.
Except for the Introduction and the concluding remarks, the main body of the book is divided into two parts. Chapters 2, 3, and 4 form the first part, which primarily discusses the litigation redress for investors under the securities law system, focusing on substantive liability. Chapters 5 and 6 form the second part, which primarily discusses the litigation methods for investors under the company law system and related legal issues.
In the first part, the author proposes the strengthening of personal liability for parties, especially directors and senior management, in light of the current reality in China's legal regulation of the securities market, where administrative and criminal liabilities are emphasized while civil liability is severely neglected. The author analyzes in detail the causes of action, liability composition, and related legal issues for holding these two categories of individuals personally liable.
The Civil Liability provisions in China's Securities Law exhibit very obvious flaws. Without a principle stipulating that parties engaged in securities fraud or other illegal activities should bear civil liability, the law specifically mentions limited types of specific liabilities, such as unauthorized issuance of securities, false disclosure, and violating client orders for securities trading. Objectively, this creates a false (or real) impression that other frauds and illegal acts do not result in civil liability, or that civil liability in other cases lacks direct legal basis.
Given the phased legislative nature of the Securities Law, the author argues that it is appropriate to moderately encourage investors to file private civil lawsuits at this stage, allowing judicial practice and academic theory to interact and gradually improve China's securities civil liability system. In this regard, the implied civil litigation right theory in U.S. securities law and the litigation practices under Rule 10b-5 provide the following valuable insights:
1. Under the premise of protecting investors and deterring securities fraud, based on general tort law principles, it can be argued that when violating prohibitory norms of securities law causes losses to others, parties should bear implied civil liability even without explicit legal provisions.
2. To facilitate practical operations and deter malicious lawsuits, only investors who have actually purchased or sold securities should be granted plaintiff status.
3. For fraudulent acts in public trading markets, the "fraud market theory" can be applied to infer the causal relationship between the illegal act and the plaintiff's losses (in terms of transactions). The "direct loss method" can be used to calculate the trading losses of investors, and depending on the situation, the plaintiff can choose between the "constant difference method" or the "true value unchanged method" to determine the true value of the stock at the time of the transaction.
Building on the experience of foreign countries, the book further analyzes in detail the main causes of action for holding directors and senior management personally liable for securities civil liability. These individuals bear personal liability either because they directly engaged in fraudulent securities trading activities, such as short selling, insider trading, and market manipulation, or because they committed related illegal acts without directly participating in securities trading, such as making false disclosures in their personal or company names.
Due to the different impacts of initial and continuous disclosures on investors and their distinct characteristics, the civil liability for false statements in these two types of disclosures differs in terms of liability subjects, liability attributes, attribution principles, the definition of causation, the calculation of compensation amounts, and plaintiff qualifications, among other aspects. Additionally, for disclosures of the same nature, the civil liability of different types of responsible parties may also differ in liability attributes and attribution principles. Therefore, it is necessary to distinguish between different types of disclosures and different types of responsible parties and regulate their false statement liability separately.
Based on this, the author critically analyzes the unscientific provisions of Article 63 of the Securities Law regarding this issue and proposes corresponding improvements.
Furthermore, if the information disclosed in proxy voting solicitation documents contains false or misleading statements or material omissions, shareholders dissatisfied with the voting results can file lawsuits to seek redress. Directors and senior management, who have the opportunity to learn about significant information about their companies earlier and more comprehensively than others, should have their trading activities in the company's stock appropriately regulated. The author argues that the short-term trading gains of directors and other insiders should be allocated to the company, which does not contradict the provisions of Article 147 of the Company Law.
Persons engaging in insider trading should, in addition to administrative or criminal liability, bear civil liability. The key to implementing this liability lies in correctly defining plaintiff qualifications and the scope of compensation. Persons engaging in market manipulation should compensate the bona fide investors who suffered economic losses due to their actions.
In the second part, the author points out that although the Company Law has preliminarily established the liability of directors to the company (and indirectly to investors) through a few provisions, the absence of a derivative lawsuit system in China so far makes it difficult to implement this liability in practice. Granting shareholders the right to initiate derivative lawsuits when directors and senior management harm the company's interests is a common practice in developed legal systems.
In the conclusion of Chapter 5, the author proposes ten legislative proposals for the derivative lawsuit legal system, covering its main content, including: plaintiff qualifications and the status of the company and other shareholders in the lawsuit, pre-litigation request procedures, the guarantee of litigation costs for the defendant, the settlement and withdrawal of the lawsuit, the business judgment rule for directors and the dismissal of derivative lawsuits, compensation for party expenses, the payment and distribution of litigation compensation, the statute of limitations, the binding force of litigation results, the determination of filing fees, and litigation jurisdiction.
The legal framework for shareholder derivative lawsuits must balance the protection of shareholder rights and the independence of corporate personality. Before formally introducing the system through legislation, shareholders' rights to initiate derivative lawsuits can be detailed in the company's articles of association to supplement the shortcomings of legal provisions.
The right to vote, the right to vote, and the right to information are the three major rights of shareholders, and the right to examine accounting records is one of the key aspects of the right to information. By exercising this right, shareholders can, on one hand, supervise the management of directors and senior management of company affairs, and on the other hand, as closely related to the research theme of this book, actively exercise their right to sue to obtain favorable litigation evidence.
Currently, the provisions of the Company Law and domestic academic research on shareholders' right to examine accounting records are extremely limited. In response to this situation, the author proposes specific ideas for improving China's shareholder accounting record examination system. The basic philosophy is to strike a balance between protecting shareholders' right to information and maintaining the independence of company business management to avoid undue external interference.